The Option Investor Newsletter Monday 11-15-99 Copyright 1998, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage Published three times weekly, Sunday, Tuesday, Thursday evenings ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-15-99 High Low Volume Advance Decline DOW 10718.85 + 14.37 10776.05 10650.35 802,412k 1,350 1,697 Nasdaq 3143.94 + 41.68 3148.20 3068.86 1,296,785k 2,101 1,953 S&P-100 724.63 + 5.83 726.61 709.83 Totals 3,451 3,650 S&P-500 1377.01 + 6.78 1380.78 1363.73 48.6% 51.4% $RUT 445.07 + 2.66 445.13 441.34 $TRAN 3031.21 + 27.22 3034.01 2994.75 VIX 22.23 - .90 23.13 21.60 Put/Call Ratio .52 ************************************************************* Holding our breath. . . . . .and waiting to exhale. Not like this is any great surprise, but the FED holds their FOMC meeting tomorrow and will finally decide the fate of interest rates for the rest of the year. Though there will be another FOMC meeting in mid December, investors are pretty sure that the FED will do nothing with regard to rates then for fear of exacerbating any potential Y2K problems. The last thing Alphonso the Great wants is an infernal roasting for making things worse, should some disaster (relatively speaking) come to pass. Never mind December. The big question remains, what's he going to do tomorrow? That will be the last practical opportunity to take back the third cut from last year. For those who missed Jim's Sunday Wrap on "will he or won't he?", I'm going to avoid re-inventing the wheel tonight by reprinting the meat. Here it is: The sides are evenly divided and each has some very good arguments. FOR: Greenspan has said repeatedly "productivity cannot continue to accelerate forever and the end result will be inflation." Although the most recent economic reports may indicate the economy may be slowing it is still growing at an alarming rate. (for the Fed) This is the last chance to take back the third rate cut from last year before February 2000. The next Fed meeting is Dec-21st, only a week before Y2K. Failure to raise rates will make all the Fed lions look like paper tigers after they have warned us all year. The Fed wants to get back to a pre-emptive stance instead of a reactive stance. The runaway market is a sore spot for the Fed and even though they say publicly that they won't raise rates "just to burst the speculative bubble" it does remain a strong supporting reason. AGAINST: What inflation? Labor costs flat. Productivity up. Inflation nonexistent. The Fed has been strangely quiet for the last several weeks. Normally the Fed heads drop hints in their weekly speeches about their mindset so a raise will not catch anyone by surprise. There have not been any notable remarks in recent weeks. Three steps and a stumble. As the saying goes, three rate hikes historically causes a stumble in the markets. The Fed does not want to do anything this close to Y2K to rock the markets. Actually, by not raising rates, some feel that the cloud of rate speculation may help keep the market in check. (Sure, just like the last two weeks speculation held the Nasdaq back.) Jim's position: They will because they can get away with it. This is the last time they can justify a hike before February. The market is in strong rally mode and a hike is already priced in. If they do not raise rates the market will explode like an F15 on after burner. There will be a six week party in the markets instead of Y2K caution. The $2 trillion in cash on the sidelines will be fighting for the same highflying stocks. In reality this is the best of all possible scenarios. They do not raise rates, we party. They do raise rates, we moan and groan and then party a day later. They get a rate hike for free. Almost all the analysts think we will see at least three more rate hikes next year to slow down the +5% growth in the economy. A hike now makes them even from the three cuts last year and puts us back to square one. Next year can start out on a level interest rate policy and the Fed will feel more comfortable. There you have it. Are we turning blue yet? Today certainly offered no clues to direction. While there was plenty of interesting news with COMDEX getting under way this week, Internets provided most of the excitement, sparked by anticipation of the Goldman Sachs fifth annual (has it been around that long?) Internet Conference, which begins tomorrow and concludes on Friday. It wasn't just any old Internets making the news. The e-finance companies, riding the coattails of President Clinton's repeal last week of archaic banking and financial laws, took off like a shot, abetted by a BankBoston Robertson Stevens making bullish comments on the industry. Schwab, though up only fractionally saw 150% of its ADV change hands today on news that it would form a new online investment bank to capitalize upon the IPO market, and help small investors capitalize upon it too. Joining Schwab in the endeavor are AMTD (+4.50), TWE(+2.38) and three venture capital firms. EGRP (+1.38) and WITC (+1.31) also showed strong gains on extra volume. Remember when we noted two weeks ago that e-finance had not yet participated with the new rally in the rest of the market? With over 1 bln shares traded daily so far since the end of October on the NASDAQ, volume is causing the revenue to rise too, which is finally getting noticed by investors, who are now bidding up shares. We are looking at and contemplating some plays here. Other Internets making a move? YHOO (+8.06, its highest level since April - no fist pumping yet, volume was a bit weak), whom will be the first presenter at the Goldman Sachs conference; AOL (+1.38); INKT (+4.81); CNET (+1.91); NSOL (+3.50); and EBAY (+3.81). INSP was up $10.25 to $73.69 on news that it would supply AT&T PocketNet (wireless Internet) portal solutions to the wireless giant, and PCLN gained $3.31 to $59.94 on news that they would offer Ford cars and trucks on the "name your own price" platform. The first dealer to accept the bid wins the sale. As a follow-up, we want to make a note that the Goldman Sachs Conference is a big deal and typically provides some juice to this sector. (Sorry to say there isn't huge attention grabbing stuff coming out of Comdex yet.) For those of you more experienced traders who can face the danger of working without a net (meaning not a published play in the news letter), keep your eye on a few of the presenters in the GS line-up, as some can present some good daytrading opportunities. Most are optionable, some not. Here's a brief run-down: 11/16 - Tuesday: YHOO, ARBA, RNWK, AMZN, PHCM, DCLK, AOL. 11/17 - Wednesday: BVSN (current play), PCLN, CNET, INSP, (LCOS - earnings after the bell met estimates, but revenues exceeded expectations - great news!), NSOL, CMGI. 11/18 - Thursday: ENTU, HLTH, INTU, INKT, EBAY, KANA, EXDS, VERT. 11/19 - Friday: RHAT. For a detailed list of scheduled times of presentations, see briefing.com, "Events" calendar". Let's look at some numbers, NASDAQ first. It almost comes as a surprise that it didn't set another record today. If you are feeling let down and a bit deprived, rest easy knowing it closed down by just a point at 3219, and traded in a very narrow 22- point range today (3214-3236). In front of a FED meeting and following new records in 10 of the last now 12 trading days, the minimal 1-point loss is really amazing. Advancers outpaced decliners 22 to 19, while sending 186 issues to new highs compared to just 77 new lows. The 5 generals, MSFT, CSCO, INTC (see below), DELL, and WCOM were all sacked for a loss today. For a market that didn't budge, that's a sign that advances are being made in the smaller to mid-size issues, which is really healthy. We have cash coming off the sidelines in record volume in search of under-bought issues to thank for that. Volume solves a lot of problems (over 1.4 bln today) and only prompts more investors to get in, lest they miss out on the big run. Yes, the market has been extended for more than a few days. But, it also goes to show that extended markets can become more extended. We can't emphasize it enough: volume is the key to big moves up. When that slacks off, there will be some pain and gravity will take over. (If you are keeping score, CSCO ($275 bln) nudged past INTC ($254 bln) last week for the number two NASDAQ market cap behind MSFT.) We saw that today in QCOM as it ran up to (gulp!!) $406, then fell back $56 (yes, $56) before regaining composure to close at $368, still a $10 loss. Telling was the volume at 70% in excess of the ADV. Other extended issues could follow. If you are sitting on big gains, this is not the time to let it ride. Keep your stops in place in case the market does that moan and groan thing. The DJIA also traded in a narrow range today too - just 86 points from 10,712-10,798, but refused to cross the 10,800 resistance line. It finished the day at 10,760, down 8 points. Advancers here beat decliners too 17 to 13 in another strong showing of the smaller to mid-cap issues. However, 120 new lows used just 70 new highs for a doormat. For FOMC eve, 903 mln shares traded were notable. While the volumes are traditionally lower on the DJIA (they don't count each transaction as buying AND selling volume), we found merger Monday spurring things along in the telecom market. First, Mannesmann rejected Vodafone's $107 bln offer as "inadequate" (OK, $108 bln, and not a penny more!). VOD finished up +5.13. Second, Corning (GLW) announced that it was acquiring Oak Industries (OAK), effectively putting itself into the photonic sub-assembly business as stiffer competition for JDSU. You'd have been happy to own OAK as the offer was for $1.8 bln, or roughly $75 per share, a 51% premium to last Fridays close at $49.75. OAK closed up $19 at $68.75. Though the acquisition is accretive to earnings, GLW closed down $3.63 at $87.13. Sympathy plays should have done well too, but not all did. One in particular, SDLI, slid over $7 to $121.69 when SG Cowan said it would suffer from the loss of business when OAK's Lasertron division gets the business. A Gruntal analyst came to the rescue (of sorts) and made a good point - the GLW/SDLI contract still has 18 mos. to run, and demand for SDLI's product is far outstripping capacity. In short, Gruntal called it a buying opportunity and reiterated its Outperform rating with an intermediate and long term target of $145 and $193, respectively. These little guys will eventually be bought up at nice premiums, SDLI included. Two other items, then we'll wrap it up. First Hewlett Packard's spin-off of Agilent is expected to price at $19-$22 per share for 57 mln shares. This will be the one to watch this week. Second, don't look now, just make a note of it - the price of oil hit a 3-year high today at over $25 per barrel, resulting from oil ministers again stating they see no reason why they can't continue current quotas past March 31, 2000. It's like carbon monoxide on the economy that will eventually show up in the price of goods and services. It's not dangerous yet, but one day when investors have nothing else to worry about, this will move to the forefront as an "issue" to be dealt with. For tomorrow, in case we haven't been entirely clear, productivity gains and low PPI are holding inflation in check, making a case for the FED to keep interest rates steady. On the other hand, they may do it anyway because they can and they'll have no other chance until next year. If you are in position now and intend to keep it through the announcement, at least set a trailing stop order to get you out on ill-received news. Otherwise, we suggest letting the smoke clear so you can evaluate the market before putting on the next trade. Sell too soon and remember to exhale tomorrow at 2:15 pm ET Buzz Lynn Research Analyst *********** STOCK NEWS *********** Vodafone Steals a Page from Bernie Ebbers' Playbook By S.P. Brown In deal that would make MCI/Worldcom's (WCOM) CEO Bernie Ebbers proud, Vodafone AirTouch PLC (VOD) stunned the European business community yesterday when it announced it was making a $107 billion offer for Germany's Mannesmann AG (MNNSY). The all stock deal calls for MNNSY to swap each one of its shares for 43.7 shares of VOD's. If the deal goes through, it would mark the second major purchase for VOD this year. In late June 1999, VOD acquired U.S. wireless communication leader AirTouch Communications in a transaction valued at nearly $60 billion. VOD's offer for the German telecom came hours after VOD CEO Chris Gent met with MNNSY's CEO Klaus Esser at the latter's headquarters in Duesseldorf, Germany. The meeting lasted for nearly three hours, but an agreement couldn't be reached, so it wasn't surprising that MNNSY rejected VOD's offer. MNNSY dismissed VOD's all-stock proposition as inadequate and not in the best interests of MNNSY shareholders. According to MNNSY's management, the proposal substantially undervalues the company and doesn't represent an attractive strategic fit. Said CEO Esser, "We cannot recommend to the Mannesmann shareholders to lose the future growth potential they own." He added, "This unsolicited proposal puts in jeopardy the value and principles of our joint ventures, our contractual agreements and, in particular, the constructive relationship between Mannesmann and Vodafone." And don't look for MNNSY to warm up to VOD anytime soon. Hostile takeovers in Germany remain rare, and further complicating the issue are MNNSY's own statutes, which limit shareholders to 5 percent of the voting rights, no matter how much of the company they own. Additionally, German law requires a shareholder to control more than 75 percent of the voting rights to exercise management control of a company. What's more, people close to MNNSY have said that the company is opposed to any friendly deal with VOD, a stance that raises the odds that VOD may turn hostile in the next few days. MNNSY's rejection of VOD's bid could trigger the biggest takeover battle in history, possibly surpassing WCOM's impending $115 billion acquisition of Sprint (FON). Acrimony between the two European telecoms began to develop last month when MNNSY announced a friendly $32.9 billion takeover of Orange PLC (ORNGY). Though VOD and MNNSY have an ongoing working relationship, they're joint owners of MNNSY's domestic wireless business in Germany and its mobile companies in Italy and France, it was this recent agreement between MNNSY and ORNGY, a competitor of VOD in its own country, that triggered VOD's interest in MNNSY as a suitor. VOD hinted something was up last Friday when it issued a statement saying it was considering "possible ways to develop VOD's long- standing relationship with MNNSY". But according to London's Sunday Telegraph, VOD isn't the only company interested in developing a relationship with MNNSY. It's believed MNNSY has also been approached by at least four potential white knights. The companies identified were British Telecom (BTY), Bell Atlantic (BEL), SBC Communications (SBC), and WCOM. A BTY overture would make sense because it would be founded on BTY's wish to boost its presence in continental Europe. Furthermore, the combination would give BTY a major stake in French cellular giant Cegetel. A spokesman for BTY declined to comment. BEL, meanwhile, VOD's partner in the U.S., is reported to be worried about the dominant position the enlarged VOD would have in the European market. Like the BTY spokesman, the BEL spokesman also took the fifth. Then there's SBC, which has had discussions with MNNSY in the past, but it's unlikely to emerge as a white knight for MNNSY because it believes the company's CEO is unwilling to give up control. Moreover, it's believed SBC is more interested in buying into a fixed-line company in Europe, rather than the cellular operations that MNNYS offers. Finally, there's WCOM, which, admittedly, is the long-shot among the quartet. WCOM is unlikely to jump into the fray because it's currently preoccupied with its acquisition of FON. Another inhibitor for WCOM is the fact the company has been handing out its stock like it's monopoly money over the past two years. Forking over another $100 billion worth of funny-money would probably prove to be too dilutive even for the deal-happy Ebbers. Still, even though it's unwanted, don't count VOD out. A takeover would make VOD Europe's dominant cellular player. It already has minority holdings in MNNSY's two most prized assets: the D2 network in Germany (35 percent-owned by VOD) and Italy's second-largest cellular player, Omnitel (22 percent-owned by VOD). Consolidating these holdings with MNNSY's majority stakes would give VOD unique pan-European coverage. VOD already controls 31.4 million subscribers, while MNNSY will control about 14 million subscribers after its impending acquisition of ORNGY is completed. The combined entity would challenge some of Europe's biggest phone carriers, including Deutsche Telekom AG (DT) and France Telecom SA (FTE). Additionally, a combination of VOD and MNNSY would create Europe's most valuable company, with a market value estimated at $257 billion. VOD's initial offer for MNNSY was valued at roughly 203 euros (a euro trades close to $1) a share. Some market observers believe MNNSY shareholders would have to look very seriously at any offer above 220 euros. Hans Peter Woeniok, head of German equity research at Credit Lyonnais in Frankfurt, said analysts were keeping close watch on MNNSY's share price closely, after the German entity stated it has the potential to drive the share price beyond VOD's offer. "It will be interesting to see how the market is going to react over the next couple of days," said Woeniok. "It seems the market doesn't believe it (VOD's) will be a successful offer." Another prominent Euro telecom watcher also believes VOD will have to up the ante if it wants any chance. "They'll need to pay around 250 euros per share," according to James Downie, telecom analyst at ABN Amro in London. He calculated that any offer above 230 euros would be dilutive to VOD's earnings, but said, "Vodafone has to do this (make a hostile offer) or they'll become marginalized. Mannesmann is strategically well placed in Europe." Downie calculates the top price for MNNSY stock would be around 270 euros, although he thinks that would be too rich a price for VOD. MNNSY is now officially in play. It's going to be interesting to see who eventually wins out and what price is eventually paid. **************** PLAY OF THE DAY **************** SNE - Sony Corp $179.06 +2.56 (+2.56) Sony is a consumer electronics and multimedia entertainment company. It sells products like TVs, VCRs, MiniDisc systems, stereos, digital camcorders, DVD video players, and the Playstation home video game system. It is also in the process of strengthening its position in the music and image-based software markets. Some of Sony's entertainment assets include Columbia TriStar Motion Picture, Columbia TriStar Television, Sony Pictures Studio, and Columbia and Epic record labels. Other high-tech products include flat-screen TVs, digital TVs, CD-ROMs, and digital cellular telephones. Turn it up! SNE gapped up at the open on Friday and managed to tag yet another new 52-week high of $177.25. Sony then entered into a bit of a mid-day lull before rallying late day to close up near the high. SNE had a great week, gaining nearly $12. Sony still maintains psychological support at $170 although with the momentum that SNE seems to have, it could very well touch $180 before $170. Resistance is the 52-week high of $177.25. Our fundamentals for this play remain intact. The Japanese economy continues to recover. This has helped the sentiment along with the expectation of a strong holiday shopping season. This is the time of year that SNE sells a lot of video game cartridges and DVD players. Not to mention we are in stock split territory. Unfortunately, we don't know what the catalyst would be for an announcement. SNE has rarely split their stock and just passed their earnings date in October with no split news. This is wild card to the play but you would think that it will become more and more likely as SNE goes higher. Also, watch out on the options as the open interest is always low in SNE contracts. You will want to be using limit orders to avoid being taken to the cleaners by the market makers. Sony will be participating in the annual Comdex show, which will be held in Las Vegas. This is the computer industry's biggest yearly trade show. Sony's president and co-chief executive, Nobuyuki Idei, will be speaking. He will be demonstrating the new Playstation 2, which is expected to make it's appearance in the United States next year. Perhaps the most anticipated feature of the new Playstation is its connectivity to the Internet along with the ability to play digital video-disks and a hard disk drive for data storage. BUY CALL DEC-170*SNE-LN OI=157 at $14.00 SL=11.25 BUY CALL DEC-175 SNE-LO OI= 57 at $10.50 SL= 8.25 low OI BUY CALL DEC-180 SNE-LP OI= 1 at $ 7.88 SL= 6.00 low OI BUY CALL JAN-170 SNE-AN OI= 69 at $17.75 SL=14.00 BUY CALL JAN-180 SNE-AP OI= 12 at $11.75 SL= 9.25 low OI SELL PUT DEC-165 SNE-XM OI= 4 at $ 2.63 SL= 1.25 low OI SELL PUT DEC-170 SNE-XN OI= 37 at $ 3.75 SL= 2.25 low OI (See risks of selling puts in the play legend) Picked on Nov 7th at $164.69 P/E = N/A Change since picked +14.37 52-week high=$180.06 Analysts Ratings 0-1-0-0-0 52-week low =$ 65.50 Last earnings 10/99 est= N/A actual= N/A Next earnings 01-00 est= N/A versus= N/A Average Daily Volume = 175 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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